Clinical Professor of Strategy; Director of Entrepreneurship Programs at Kellogg; Faculty Director of the Zell Fellows Program; Director of the Levy Institute for Entrepreneurial Practice
Does buying a business count as entrepreneurship?
That’s a question I’ve observed many aspiring entrepreneurs ask themselves—and me—as they consider the path forward. They’re not sure acquiring and operating a business counts as true entrepreneurship.
Specifically, when they think of entrepreneurship, they picture starting something from scratch, building it with sweat and tears to stand triumphantly atop a newly minted startup that fills a key market gap. This narrow view makes sense because that’s the romanticized version of business-building fed to us by media coverage, biographies/biopics, and other sources—the something-from-nothing narrative. This archetypical view of entrepreneurship even fits into several of the seven “basic plots” of storytelling: the hero’s journey, rags to riches, overcoming the monster, and the quest.
But does that mean entrepreneurship is exclusively about building something new? No! Far from it. Consider Webster’s definition of an entrepreneur: “One who organizes, manages, and assumes the risks of a business or enterprise.” That encompasses a wide range of activities, and entrepreneurship through acquisition (ETA) fits neatly within it.
In fact, ETA is one of the fastest-growing paths to entrepreneurship, with especially favorable current circumstances for those who’d consider it. In this article, I’ll talk about why ETA is a good way to go and share important tips and watch-outs for those who may choose to go there.
One of the biggest reasons ETA is attractive is that it represents lower risk. Not surprisingly, buying an existing business that has already achieved product-market fit and recurring revenue is a safer bet than wading into uncharted waters with a startup. For example, with ETA you can likely pay yourself a reasonable salary immediately—rather than waiting years with a startup—and reinvest in the business from existing cash flows rather than outside capital or personal savings.
Running a company you’ve acquired provides freedom from seemingly oppressive hierarchies, bad bosses, and sudden layoffs.
But along with that added safety, ETA still provides the entrepreneurial autonomy many seek, as more and more of my MBA/EMBA students do. Running a company you’ve acquired provides freedom from seemingly oppressive hierarchies, bad bosses, and sudden layoffs. If you buy in an industry familiar to you, you can apply your knowledge of sector dynamics, value drivers, and potential partners to accelerate an acquired business’s growth and improve operations quickly.
Moreover, it’s a very good time for ETA from supply and investment perspectives. For example, many Baby Boomers are running businesses they own but don’t have heirs and will be looking to sell before long. And despite recent financial-services travails, money is still relatively cheap, and you can finance the purchase of a business with debt, rather than give equity away to investors. It’s a myth that you need independent wealth to buy a business: for not much more than $60,000 in cash, you could buy a business with $1.5M million in EBITDA, thanks to SBA programs and others that enable you to use leverage to limit personal exposure.
ETA also provides an opportunity to make 1+1 = 3. This involves combining assets that are similar—such as buying multiple dry-cleaning outlets or HVAC-repair businesses as part of a roll-up, or engaging in a strategy of vertical integration such as acquiring a manufacturer and retailer in the same industry to realize economies of scope and scale.
There are multiple models of ETA. One model is a self-funded search. Another is raising a search fund. And another is working with an accelerator that incubates your search and provides support with funding, mentorship, and others. For example, the Kellogg School, where I teach, runs the Zell Fellows program as exactly this kind of ETA incubator.
While ETA is a very promising route to entrepreneurship, there are common mistakes aspirants make and best practices all should follow. Here are some of the most common I’ve observed.
Don’t forget culture. When you buy a business, you’re buying not just the assets and operations but the culture. That can be easy to forget. For example, when I ask my budding ETA entrepreneurs what their 100-day post-acquisition plan will be, the vast majority say they’re going to scrutinize the balance sheet, supply chain, operations, and the like for potential improvements. But sometimes they fail to consider how much employees and less-visible things like culture and morale matter. It’s a living, breathing thing you’re taking on, like adopting a teenager rather than an infant. Be respectful of that and proactive about evaluating and addressing culture. Indeed, if you’re deeply passionate about creating a culture from scratch, the startup route may be a better option for you.
Less sizzle, more steak. The reality is that the best target businesses for ETA are often the least sexy. We’re talking roofing, restoration of manufacturing equipment, and food service. These may lack some of the “sizzle” of other offerings like high tech, but they represent more of the “steak” through sustainability and lower risk. Again, know what matters to you to understand whether and how you should go about ETA.
Be on the ground. It’s critical to get to know your business from the ground up—ideally before you make the acquisition. Spend time on the assembly line and out in the field with service employees. Talk to those in the factory and front line. This is a way to get to know not only the operations—including understanding potential improvements—but also the people and culture, developing empathy for employees and routes to improve satisfaction and morale.
In short, buying a business absolutely counts as entrepreneurship, and it’s a great time for ETA. Follow the ideas here to understand whether ETA is right for you and the best way to go down this promising path.
This article originally appeared in Inc.